Income Taxes

Income tax expense is comprised of the following:



	Year Ended December 31,
(In thousands)	2014		2013		2012
Taxes currently payable
Federal	$	52,514	$	24,426	$	48,359
State	4,763		3,496		2,655
Deferred expense (benefit)	44,666		51,585		4,679
Total income tax expense	$	101,943	$	79,507	$	55,693

The actual income tax rate differs from the statutory tax rate as shown in the following table:



		Year Ended December 31,
		2014		2013		2012
Statutory rate		35.00	%	35.00	%	35.00	%
Increase (decrease) in rate due to:
	Interest on tax-exempt securities and tax-free loans, net	(2.77	)	(3.16	)	(3.23	)
	Merger expenses at acquisition	—		0.54		—
	Reduction in excess tax reserves	—		0.11		—
	Bank owned life insurance	(2.10	)	(2.53	)	(3.10	)
	State income tax (net)	0.91		0.87		0.94
	Tax credits	(0.96	)	(1.06	)	(1.14	)
	ESOP Dividends	(0.13	)	(0.14	)	(0.21	)
	Nondeductible meals and entertainment	0.22		0.27		0.25
	Other	(0.18	)	0.31		0.83
Effective tax rates		29.99	%	30.21	%	29.34	%

Income tax expense as reflected in the previous table excludes net worth-based taxes, which are assessed on financial institutions in lieu of income tax in Ohio, Pennsylvania and Michigan. These taxes are $8.2 million, $9.9 million, and $7.8 million in 2014, 2013, and 2012, respectively, and are recorded in other operating expense in the accompanying Consolidated Statement of Income.

Principal components of the Corporation’s net deferred tax asset are summarized as follows:



		Year Ended
		December 31,
(In thousands)		2014			2013
Deferred tax assets:
	Allowance for credit losses	$	35,760		$	37,857
	Employee benefits	51,584			33,676
	Real Estate Mortgage Investment Credit	4,831			5,645
	Acquired liabilities	6,296			14,768
	Acquired loans	51,701			62,993
	Available for sale securities	3,862			16,819
	Loan fees and expenses	—			2,777
	Federal NOL carryforwards	131,195			190,350
	Alternative minimum tax credit carryforward	83,428			41,882
	General business tax credit carryforward	1,982			5,715
	State income tax (net of federal benefit)	1,970			4,728
	Other	467			—
	Total deferred tax assets	373,076			417,210
Deferred tax liabilities:
	Leased assets and depreciation	(24,699		)	(25,818		)
	FHLB stock	(18,165		)	(24,401		)
	Loan fees and expenses	(2,537		)	—
	Goodwill	(16,580		)	(7,129		)
	Core deposit intangibles	(22,013		)	(25,302		)
	Other	—			(3,510		)
	Total deferred tax liabilities	(83,994		)	(86,160		)
Total net deferred tax asset		$	289,082		$	331,050

At December 31, 2014 and 2013, there was no valuation allowance for deferred tax assets.

At December 31, 2014, the Corporation had gross federal loss carryforwards of $374.8 million that expire in 2028 through 2032, general business credits of $2.0 million that expire in 2028, and $83.4 million of federal alternative minimum tax credits with an indefinite life. In addition, future state income taxes are expected to be reduced by $2.3 million resulting from state non-operating losses at various levels in various states. This benefit is expected to be fully used during the expiration period of 2014 through 2027.

The period change in deferred taxes recorded both directly to shareholders’ equity and as a part of the income tax expense is summarized as follows:



		Year Ended December 31,
(In thousands)		2014			2013
Deferred tax changes reflected in other comprehensive income		$	(2,698	)	$	(27,285	)
Deferred tax changes reflected in Federal income tax expense		44,666			51,585
Deferred tax changes reflected in acquired net assets		—			(348,239		)
	Net decrease/(increase) in DTA	$	41,968		$	(323,939	)

Income tax benefits are recognized in the financial statements for a tax position only if it is considered “more likely than not” of being sustained on audit based solely on the technical merits of the income tax position. If the recognition criteria are met, the amount of income tax benefits to be recognized is measured based on the largest income tax benefit that is more than 50 percent likely to be realized on ultimate resolution of the tax position.

A reconciliation of the change in the reserve for uncertain tax positions for 2014 and 2013 is as follows:



(In thousands)	Federal and State Tax			Accrued Interest and Penalties			Gross Unrecognized Income Tax Benefits
Balance as of January 1, 2014	$	1,003		$	262		$	1,265
Additions for tax provisions related to prior year	798			14			812
Reduction for tax positions related to prior year due closed tax years	(31		)	(3		)	(34		)
Reduction for tax positions related to prior tax years	(1,465		)	(254		)	(1,719		)
Balance at December 31, 2014	$	305		$	19		$	324
Components of Reserve:
State income tax exposure	$	305		$	19		$	324
Balance at December 31, 2014	$	305		$	19		$	324

(In thousands)	Federal and State Tax			Accrued Interest and Penalties			Gross Unrecognized Income Tax Benefits
Balance as of January 1, 2013	$	953		$	854		$	1,807
Additions for tax provisions related to prior year	77			72			149
Reduction for tax positions related to prior tax years	(27		)	(664		)	(691		)
Balance at December 31, 2013	$	1,003		$	262		$	1,265
Components of Reserve:
Potential adjustment to nondeductible interest expense	$	30		$	5		$	35
State income tax exposure	973			257			1,230
Balance at December 31, 2013	$	1,003		$	262		$	1,265

The Corporation recognized accrued interest and penalties, as appropriate, related to UTBs, in the effective tax rate. The balance of accrued interest and penalties at the reporting periods is presented in the table above. The reserve of uncertain tax positions is recorded in accrued taxes, expenses and other liabilities on the Consolidated Balance Sheet.

The Corporation is routinely examined by various taxing authorities. With few exceptions, the Corporation is no longer subject to federal, state and local tax examinations by tax authorities for years before 2011. The expiration of statutes of limitation for various jurisdictions is expected to reduce the UTB balance by approximately $0.05 million within the next twelve months. Management anticipates that the UTB balance will increase by $0.2 million as a result of the 2014 tax filings in the next twelve months. If the total amount of UTBs were recognized the effective tax rate would decrease by 9 basis points to 29.90% at December 31, 2014.

Management monitors changes in tax statutes and regulations and the issuance of judicial decisions to determine the potential impact to uncertain income tax positions. As of December 31, 2014, Management had identified no other potential U.S. Treasury regulations or legislative initiatives that could have a significant impact on the UTB balance within the next twelve months.